Whether you like it or not, the move toward renewable power is a certainty in the energy sector.
But as we've discussed here before, there are significant impediments to a continued and robust adoption of renewable energy.
The primary roadblock is cost – but not in the way you might think…
The expenses involved in generating solar and wind power have actually declined significantly over the past several years.
Additionally, these days we're talking more about "grid parity" – when renewables match the cost of generating and putting electricity on the wider grid.
In many parts of the United States, solar and wind have improved to a point where they cost about the same as more traditional sources of power.
As loyal readers saw last September, this improvement has resulted in solar reaching a federal milestone much earlier than expected.
But the issue hardly ends there…
A few weeks ago, we talked about the strange situation in Germany, where consumers have actually been paid to use electricity.
That is one wrinkle in the new "ceiling debate" on how far (and how fast) renewables can be expected to increase.
But the problem has always been balancing when the electricity is generated with when it's needed.
Given the lack of significant capacity to store electricity, it must largely be consumed as it's produced. To ensure even peak demand can be met, this results in excess generating capacity.
In other words, the more electrical generation in places like the United States and Western Europe, the more pressure there is on bottom lines. In the power generation sector, this is measured using "return on kilowatt hour produced."
As this situation becomes more acute, it will progressively act as a barrier to the rapid expansion of renewables, with two important caveats…
Developing Countries Won't Give Up on Coal
First, much of the world is in dire need of ever more electricity.
Whereas in the developed world, overall demand is largely flat, that's not the case for the over 70% of the globe's population living in developing countries.
Among other things, the move to solar makes a lot of sense in places like the Middle East, North Africa, and Asia, where the climate bodes well for maximum sunshine.
In specific areas in these regions, using more renewables allows countries to export – rather than burn – oil and even coal.
That's a pretty enticing way to increase your country's revenue.
Therefore, limiting the conversation to the developed OECD countries skews the picture somewhat.
Second, the next wave of solar and wind advances in places like the United States will be a replacement for existing power generation rather than an addition.
In this case, it's less about increasing overall generating capacity as it is a matter of moving production from coal to renewable energy.
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Now, the change from coal to natural gas has been a hot topic of conversation over the past decade. An additional move away from gas to renewables is less likely.
For that matter, while declining in its percentage of the generating sector, the further drop in coal is probably going to be leveling off over the next several years.
There are dual considerations here: the overall age of the generating plants and the existence of a positive cost differential in several parts of the country.
That's why I expect the rise of a new kind of power generation…
About the Author
Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk assessment, and emerging market economic development. He serves as an advisor to many U.S. governors and foreign governments. Kent details his latest global travels in his free Oil & Energy Investor e-letter. He makes specific investment recommendations in his newsletter, the Energy Advantage. For more active investors, he issues shorter-term trades in his Energy Inner Circle.